Equity · 409A
Is your 409A still usable for this grant?
Before a supported option workflow relies on an exercise price, check the fair-market-value support the company is using, when it was established, and whether later facts could have made it stale.
Tax-sensitive content. A company-specific valuation conclusion depends on current facts, the security being valued and the valuation method.
Direct answer
The tax question is fair market value—not whether a PDF is called “409A.”
A private-company nonstatutory option generally avoids being treated as deferred compensation under §409A when the regulatory stock-right conditions are met, including an exercise price that is not below fair market value on the grant date. An independent appraisal is a common way to support that value, but whether one is appropriate depends on the company’s facts.
What to check
Use the valuation that fits the grant date and current company facts.
- Valuation date and method
- Security / class being valued
- Recent financing or arm’s-length transactions
- Material events after the valuation date
- Proposed exercise price
- Grant date and option terms
Sequencing proof
“Less than a year old” is not the whole test.
- Independent valuation dated within the prior 12 monthsEvidence located
- Material financing closed after valuation dateRecheck
- Proposed option grant price equals prior common-stock valueDo not rely yet
A valuation can become unusable before 12 months if later information materially affects value. Recheck the pricing support before the grant relies on it.
Before / Next
Price support sits inside the option workflow.
Founder questions
Separate the rule from the startup shorthand.
What is a 409A valuation?
For private-company equity compensation, “409A valuation” commonly refers to a valuation used to support the fair market value of common stock for option pricing. The tax rule is broader than the appraisal itself: a nonstatutory stock option can fall outside §409A when, among other requirements, its exercise price is not less than fair market value on the grant date and it has no impermissible deferral feature.
Does every option grant legally require an independent 409A appraisal?
No. The regulations require a reasonable fair-market-value determination for the stock-right exception; an independent appraisal is one method that can receive a presumption of reasonableness when its requirements are met. Startups use independent appraisals because they create a documented valuation process, not because the statute names a particular vendor report.
How long is a 409A valuation good for?
Do not treat “12 months” as an unconditional expiration date. The regulations say a previously calculated value is not reasonable if it is more than 12 months old, and it can become unreasonable sooner when later information materially affects company value.
What events can make an older valuation stale?
Material company events can change the fair-market-value analysis. Examples can include a financing, acquisition offer, major change in financial outlook or other information that materially affects value. Whether a new valuation is needed is fact-specific.
Is 409A the same as the preferred-stock price in our financing?
No. Preferred financing prices and common-stock fair market value can differ because the securities have different economic rights. The valuation method should consider relevant company facts and recent arm’s-length transactions rather than mechanically copying a preferred price.
Know first